ABSTRACT
Two major recessions have weakened the British economy by promoting uncertainty and discouraging long-term investment. Of course, costs have been squeezed and labour productivity increased; but it is important to see the larger picture. The fruits of higher productivity have mostly been consumed, not invested, because that was part of the grand accord between industry/ government and those in work. In exchange for greatly increased work intensity and less job security, wages per head of those in work rose.1 It is doubtful whether productivity could have risen so fast without this accord. But since the ‘bunkered’ economy is in no shape to mop up the surplus army of displaced workers, the enduring legacy of the 1980s economic policies is mass unemployment. If the problem with the Lawson boom of the late 1980s was that demand increased too rapidly, we may expect that it will be beyond the end of the century before employment drops to its ‘equilibrium’ level. Put differently, for about twenty years actual employment will have been a million higher than its equilibrium level. When it is realised that this is an optimistic scenario based on the belief that it is labour market reforms-rather than technology, training or investmentthat galvanises an economy, the scale of the policy challenge becomes evident. Indeed, previous government projections, and those of many independent commentators, are more sanguine, predicting unemployment still at around two million by the end of the century. What is an appropriate policy response? The economy needs long-run supply-side policies: poor performance cannot be cured by macroeconomic shocks, which seem to be most powerful in inducing real recessions and
nominal booms (Allsopp, Jenkinson and Morris, 1992). So much is merely commonplace. But there are sunk costs in the old regime, which is still defended by influential sniper fire and entrenched political support. Change will be slow and grudging, and arguments will have to be won point by point.
